President Rebuffs GOP-Led Senate on Plan to Cut Deficits

President Reagan yesterday torpedoed a proposal from the Republican-led Senate to raise taxes and delay Social Security increases, casting new doubt over whether the administration and Congress can achieve their goal of slashing $200 billion deficits by half over the next three years.

While prodding Congress to "get down to business and produce a budget" before taking a month-long recess scheduled to start Friday, Reagan rejected key elements of the latest compromise offer. The Senate plan included oil import fees and biennial, rather than annual, inflation adjustments for both Social Security increases and income tax brackets.

In a dramatic reversal of the usual partisan response to a Reagan initiative, Senate Republicans reacted with disappointment and anger, while House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) greeted Reagan's statement with conciliatory acceptance.

It was the second time in less than three weeks that Reagan sided with the Democratic-controlled House against the GOP-led Senate. The Senate was already seething over his earlier decision to abandon its proposal to freeze Social Security benefits. Together the two moves raise serious questions about relations between Reagan and Congress during the remaining 3 1/2 years of his administration.

"There will not be too many Republican senators listening to pleas from the White House on anything," Senate Majority Leader Robert J. Dole (R-Kan.) said, citing "a great deal of frustration" on the part of his fellow Republican senators.

Both Dole and Domenici spurned further administration involvement in congressional budget deliberations, with Domenici firmly rejecting an offer of help from White House chief of staff Donald T. Regan.

Dole also warned bluntly that, if there is no House-Senate budget agreement, "there will be no tax reform this year." That would doom for now one of the major domestic initiatives of Reagan's second term.

O'Neill, while emphasizing that he still disagrees with the administration on budget priorities, said Reagan's statement "clears the air" and added, "I accept the president's decision . . . . Based on the president's statement, we all know what is possible this year."

While declining to claim victory, O'Neill said, "I think we're doing very well in the House . . . . We're not part of the argument. This argument is between the Senate and their leader: the president of the United States."

Senate budget conferees met late yesterday and decided to try 24 hours of private negotiations between leaders of the House and Senate bargaining groups in hopes of laying the groundwork for an agreement that could be accepted by the two houses.

"Needless to say, there wasn't a great deal of enthusiasm" among senators for continuing the talks, said Domenici, but they were "responsible people" who want a budget. However, he said continuing disputes between the House and Senate over the extent of domestic program cuts will make an agreement "tough" to reach.

Although Domenici had said earlier he was "ambivalent" about whether a budget that could be worked out under the White House constraints is "better than no budget at all," Dole was pushing for "what we can get," as he put it.

Dole said he wanted a budget, even though it would probably lead to considerably less than the $65 billion in deficit reductions next year -- and totaling $338 billion over three years -- that the Senate had proposed.

Dole said an agreement would probably claim deficit reductions exceeding $50 billion "on paper," but he contended that actual savings would be in the $40 billion range. That would mean even smaller future savings than hoped for. Dole and Domenici also questioned whether such an agreement would be approved by the Senate.

If a compromise can be reached, "it's pretty clear it won't do the job," said Domenici. "Nobody should be fooled -- the deficits will be recurring year in and year out, well beyond what we can afford," he added.

Domenici made no attempt to hide his displeasure with Reagan's decision, describing himself as "very disappointed." Asked how he felt getting undercut for a second time, he replied tersely, "I'm getting used to it."

When chief of staff Regan offered help yesterday in wrapping up a budget, Domenici said he told him, "Thank you very much but we'll get on with it ourselves." Dole also ruled out further deference to the White House, saying, "The budget process is now directly in the hands of Congress . . . without White House help."

In offering their plan last week, Senate leaders embarked on a high-risk strategy of challenging both Reagan and O'Neill on taxes and Social Security. In addition to their accord on Social Security, Reagan and O'Neill had come to a live-and-let-live arrangement on taxes, with O'Neill saying he would not support tax increases unless Reagan proposed them and Reagan adamantly refusing to do so.

Over three years, the oil import fee ($5 a barrel on crude oil and $10 on refined products) would save $25 billion, the delay in Social Security adjustments $12 billion and the delay in tax indexing $7 billion. Tax increases, including expanding coverage of Social Security and Medicare to state and local government workers, would constitute about 12 percent of the package.

Largely because of Reagan's firm resistance to tax increases, neither of the original budgets passed by the House and Senate contained any major tax increases. But Senate Republicans, caught in a difficult dispute with House Democrats over the extent of domestic spending cuts, became increasingly convinced that tax increases would be necessary.

Domenici made that point again yesterday, saying, "The question is not whether we have to have additional revenues . . . but when, when is 'last-resort' time" -- a reference to Reagan's insistence that he would consider tax increases as a "last resort" only after all feasible spending cuts have been made.

But, according to a White House summary, Reagan told Dole in a telephone conversation that, without the Social Security and tax provision, there was still an opportunity for more than $50 billion in deficit cuts next year.

Elaborating on the statement, presidential spokesman Larry Speakes said "$59 billion is not to be sneezed at," and suggested that three-year savings would amount to $293 billion.

He said Reagan couldn't see abandoning his long-held views against tax increases and had gone along with the Social Security cutback only to get a budget through the Senate, having earlier taken the position there had to be a bipartisan majority for it in both houses. "Clearly there is not bipartisan support" for it, Speakes added.

Domenici questioned the degree of White House determination to cut deficits, saying, "Will is lacking everywhere," particularly the White House.

Reagan's decision came as Senate and Republican leaders, including Dole, O'Neill and a presidential confidant, Sen. Paul Laxalt (R-Nev.), were preparing to meet to discuss the Senate offer and possible alternative proposals. After that session ended inconclusively, Regan met with Domenici and House Budget Committee Chairman William H. Gray III (D-Pa.) to explain the president's position.

Senate sources said Reagan has invited Domenici and Gray to the White House for lunch today. Domenici said the private talks between leaders of the House and Senate negotiating teams will begin early today.